In most states, professionals, such as attorneys, doctors, optometrists, certified public accountants, architects, psychologists, and psychiatrists, have fewer choices when it comes to selecting a legal structure for their businesses. Legal entities (such as corporations and Professional Corporations) and the rules that govern them vary state-by-state, so it’s crucial to understand what you need to do to protect your professional company.
What is the Difference Between a Corporation and a Professional Corporation?
Business owners choose to incorporate their companies primarily for the personal liability protection it offers the owners and shareholders. In a C Corporation, the business is legally a separate entity from the owners, and all activities (profits, losses, etc.) of the corporation belong to the corporation. Plus, the owners are employees of the corporation. Investors like the protections a C Corporation offers, so if you want to attract funding, being a C Corporation will likely make raising money easier.
However, if professionals were automatically protected from personal liability, they could form a corporation to avoid taking professional responsibility for their actions. This would mean, for instance, that clients couldn’t sue doctors or lawyers for malpractice. So instead, in most states, professionals who want to incorporate must form a Professional Corporation. The Professional Corporation still limits the owners’ personal liability for business debts and claims; however, it does not protect the professional owner against liability for their own negligence or malpractice. More on this in the next section.
Some states allow certain professionals to form a Professional Limited Liability Company (PLLC), which also offers the liability protection of a corporation and a regular Limited Liability Company (LLC).
For example, in Idaho, you can form a PLLC for the following types of businesses:
- Chiropractic, Dentistry
- Landscape Architecture
- Occupational Therapy
- Physical Therapy
- Professional Geology
- Certified or Licensed Public Accountancy
- Social Work
- Veterinary Medicine
As in a regular LLC, the compliance obligations are fewer than those involved in a corporation, and the organizational structure is a bit less formal. If your state offers the PLLC, talk to your accountant and/or attorney to see if it’s the right business structure for your company. If you’re not sure about what structure options your state offers for professionals, CorpNet can help you with the research and do all the proper filing for you.
What Are the Benefits of a Professional Corporation?
Many solo professional entrepreneurs start their companies as sole proprietors and hope their business insurance will cover any liability issues. And although it is simpler to operate a sole proprietorship than a corporation, most professionals want to increase their liability protections as their business grows.
As we mentioned above, a Professional Corporation offers the owners some liability protection from the business. It doesn’t protect you from liability due to your own negligence or malpractice—an issue specific to running a professional company. For negligence and malpractice coverage, a professional would need to buy the proper liability insurance.
Forming a Professional Corporation can protect you from the negligence and malpractice of any other professionals in the business. So, for example, if a co-owner of a professional company gets sued for bodily injury, they would be the only owner on the line for any settlements awarded. Because the business is a Professional Corporation, the other owners and the business are protected from liability.
Like a regular corporation, owners must file formation documents (Articles of Incorporation) with the Secretary of State’s office. The difference is that in a Professional Corporation, the documents must first get approval from the appropriate state licensing board, and every owner practicing in the business must be certified in the professional industry.
In addition, many states require specific words to be included in the official corporate name of the professional company. Usually, the corporate name must include either the names of one or more of the owners, the names of one or more deceased former owners, or any combination of those names. Typically, the corporation’s name must also end with an identifying word such as “Corporation,” “Incorporated,” “Limited,” “Chartered,” “a Professional Corporation,” or the abbreviation of one of these words.
Can a Professional Corporation Be an LLC?
If you’d rather structure your company as an LLC, you first need to know if PLLCs are allowed in your home state. As of this writing, the states that offer PLLCs are:
- New Hampshire
- New York
- North Carolina
- North Dakota
- South Dakota
- Texas, Utah
- West Virginia
- Washington D.C.
If your state does not offer a PLLC as a business structure choice, you have two options: 1. You can file and structure your company as a Professional Corporation; or two. You can register your professional business as a PLLC in a state that offers the PLLC structure. Both methods work but carry with them specific compliance issues you need to be aware of.
For example, if your professional business is located in Delaware, where the PLLC is not available, you can structure and register your business as a PLLC in Arizona. However, because the company is operated out of Delaware, you would need to apply for Foreign Qualification in Delaware. Likewise, if your PLLC is in Arizona and you want to do business in another state, you would need to foreign qualify in the other state. In California, professional businesses can only be structured as sole proprietorships, partnerships, or professional corporations.
Can a Professional Corporation Be an S Corporation?
Professional corporations, like traditional corporations, can structure as C Corporations or S Corporations. The default form is the C Corporation, and that is how you register your business with the Secretary of State’s office. Once the corporation is officially registered, it can elect S Corp status with the Internal Revenue Service (IRS) by submitting IRS Form 2553. When a corporation elects S Corp status, it is essentially telling the IRS it wants to maintain the liability protection of a corporation but be taxed as a partnership. Partnerships are pass-through entities, meaning all business income is passed through to the owners/shareholders and taxed at the individual tax rate. This avoids the double taxation of a C Corporation and allows the owners to save on self-employment taxes by splitting payments between salaries and shareholder distributions.
There are some restrictions for a corporation to remain an S Corp. For example, only one class of stock can be offered to stockholders, the S Corp can only have up to 100 stockholders, and no stockholders can be nonresident aliens.
To elect S Corp status, the business must complete and file IRS Form 2553 no more than two months and 15 days after the beginning of the tax year or at any time during the tax year preceding the tax year it is to take effect.
How is a Professional Corporation Taxed?
Like a traditional corporation, a Professional Corporation is taxed at a flat rate of 21%. The Professional Corporation files IRS Form 1120 (U.S. Corporation Income Tax Return) and issues a Form K-1 to all shareholders stating its profit or loss. Also, like a traditional corporation, Professional Corporations are subject to double taxation as the corporation pays income tax on its revenues and shareholders pay taxes on their wages. Unless, as mentioned above, the Professional Corporation elects S Corp status and avoids the double taxation.
Finally, the tax deductions Professional Corporations can take are the same ones available to traditional corporations. Salaries, benefits, and many expenses are tax-deductible. Professional Corporations can create retirement plans for their employees and are allowed higher contribution limits than other business structures.
CorpNet Can Help
Do you need help forming your Professional Corporation? CorpNet can assist you and your attorney in preparing and filing the necessary documents with the appropriate state office. Contact us today!